Tax Planning and Filing for Cryptocurrency Traders

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If you’re a cryptocurrency trader, your crypto income isn’t restricted to the virtual realm – it is taxable income. We know, the concept can be intimidating and the whole affair seems complex. Allow us to guide you about know-how of cryptocurrency taxation.

How does the IRS treat cryptocurrency?

For IRS tax purposes, cryptocurrency is considered capital property. Thus, in this case, US tax filers should file a Schedule D with their normal 1040 form. You must report a capital gain or loss on each transaction. These transactions include coin-to-currency sales, coin-to-coin trades, and purchases of goods/services using a coin. Remember to deduct coin fees & other expenses appropriately. When it comes to coin-to coin trades, one should “impute” a sales or exchange transaction to report a capital gain or loss.

What are the tax implications of such transactions?

Trading cryptocurrenciesGenerates capital gains/losses. In the event of a loss, gains are offset and tax is reduced.

Exchanging one token for anotherAs the token is treated as being sold, capital gains or losses arise.

Receiving payments in cryptoWhether it’s in exchange for goods/services or as salary, the amount is treated as ordinary income.

Spending cryptoA tax event that may create short/long-term capital gains or losses.
Converting a cryptocurrency to U.S. dollars or another currencyIf done at a gain, the currency generates capital gains as it’s treated as being sold.

Air dropsConsidered ordinary income on the day of the air drop, making that value the basis of the coin. Capital gain will be created when it’s sold/exchanged.

Mining coinsTreated as ordinary income equal to the fair market value of the coin the day it was successfully mined.

How has the new tax reform affected cryptocurrency?

Known as the “like kind” or 1031 exchange, bitcoin investors switching over to Ethereum, litecoin, or other altcoins could defer paying taxes on the original bitcoin. But the Republican tax reform has removed this exemption. However, this doesn’t come into effect till filing tax in 2019.

What are some useful tips for filing crypto taxes?

Document each transactionYour aim here is to show income generated from cryptocurrency. This refers to all crypto assets which were converted to non-crypto assets like goods/services/cash. To give concrete information, maintain a record of your transactions with the help of the blockchain or data from your wallet provider.

Donate to charityTo minimise the tax you pay, give digital assets like bitcoin/ethereum to charity! For instance, if you buy $100 worth of ether and it appreciates to $1000, you get a $1000 deduction on taxes. Further, you’ll also avoid tax on the $900 capital gain. However, you must gift directly instead of selling first for that will warrant a tax on the gains.

Don’t skip out on crypto taxesIf the IRS catches you evading taxes, you’ll be sent a deficiency notice which you can either pay or contest. Common fees include a “substantial understatement” penalty and “negligence or disregard of the rules” penalty, which are an additional 20 percent of the net understatement of tax. If you’re suspected to have faked your tax return despite knowing about, bitcoin tax rates and laws, you’ll be charged an additional 75 percent of the underpayment for fraud.

For further guidance, you can refer to the IRS’s Notice 2014-21. Or you can contact us, the best tax service in Irving & Plano, at tax@mytaxfiler.com.